MLGW Meets the Challenges of the Restructured Gas Industry

Business Perspectives, Spring 2005 | Go to article overview

MLGW Meets the Challenges of the Restructured Gas Industry


MLGW's mission is to provide customer-focused, reliable, safe, and cost-effective utility services to the Greater Memphis community. There are continual challenges in trying to meet these goals, and MLGW's strategic plan has three areas of focus to keep the utility on course: (1) customer relationships, (2) core business, and (3) cost-control.

These three areas of focus are evident in MLGW's approach to the changing landscape of the natural gas industry. Since the winter of 2000-2001, a great deal of focus has been placed on the cost of natural gas. As wholesale prices have risen nationwide during the past several years, utilities and customers alike are paying more for natural gas. As a result, the industry as a whole has received a great deal of attention from the media. The Memphis media is no different, and MLGW has worked continually to provide the media and its customers with a great deal of information regarding natural gas prices.

According to MLGW President and CEO Joseph Lee III, "The economic principles of supply and demand are evident in the natural gas industry today. Increased natural gas usage is tightening national supplies, and natural gas is being used more frequently to fuel electric generation facilities. When that demand increases relative to the available supply, it drives up the prices we all must pay."

MLGW Supplies and Facilities

Since the deregulation of the gas industry in 1993, MLGW has purchased its gas requirements on the open market from a variety of producers and marketers. These requirements are delivered through three interstate pipelines: Texas Gas Transmission, Trunkline Gas Company, and ANR, Inc. MLGW also owns and operates two LNG (Liquefied Natural Gas) facilities, which are used to help meet peak day requirements.

MLGW purchases natural gas from these suppliers, which deliver the fuel to city gate stations. At these facilities, natural gas is measured and sold, pressure is adjusted to match the distribution system, and a chemical odorant is added. MLGW's distribution network is more than 3,500 miles long and delivers natural gas to both residential and commercial/industrial customers. On the customer side, the natural gas passes through a meter that records the consumption.

Deregulation Increases Options

Prior to the deregulation of the gas industry, MLGW purchased its natural gas and transportation from a single pipeline, much like the electric division is required to purchase all of its electricity and transmission from the Tennessee Valley Authority. This single pipeline provided MLGW with one fixed cost. With deregulation, however, more supply and transmission options were made available to MLGW, and with these options have come more volatility in pricing.

One big difference in this deregulated market is that MLGW now assumes the risks associated with demand and short-term prices. It is up to the utility to determine its peak day demands and seasonal demands, and adjust its purchasing accordingly. In addition, while most contracts between pipeline companies and producers in the pre-deregulation era were long-term in nature, these contracts are now primarily short-term.

FERC Orders 436 And 636 Bring Changes

Two key changes were instrumental in the deregulation of the natural gas market. The Federal Energy Commission's (FERC) Order 436, issued in 1985, encouraged interstate pipelines to offer open-access transportation to local distribution companies such as MLGW, as well as natural gas end-users. This open-access transportation ended the monopoly that interstate pipelines had previously enjoyed with respect to the transportation and sale of natural gas. Though not required under FERC Order 436, MLGW immediately offered open-access to its customers, and large industrial customers in particular quickly took advantage.

The most significant industry change for MLGW was FERC Order 636,known as the Restructuring Rule, which went into effect on Nov. …

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MLGW Meets the Challenges of the Restructured Gas Industry
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